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Wednesday, November 23, 2011

What is Yahoo Doing!

Story first appeared in USA TODAY.

Even as Yahoo rolls out a fresh batch of social and mobile products and services, its strategic moves continue to baffle investors and analysts alike.

And at least one major shareholder isn't happy. Hedge fund manager Daniel Loeb, in a letter to Yahoo's board on Friday, pushed for the ouster of director and company co-founder Jerry Yang. Loeb, who owns a 5.2% slice of Yahoo through a fund called Third Point, asserts that Yang has too many conflicts of interest.

Chief among them is Loeb's contention that Yang is in discussions with several buyout firms about joining forces to acquire a controlling stake in Yahoo. Loeb's letter names the Blackstone Group, KKR, Providence Equity Partners, Silver Lake Partners and Texas Pacific Group as firms talking to Yang, who co-founded Yahoo in 1995 with David Filo.

Yang had no comment.

The shareholder hullabaloo is just the latest distraction for the scuffling Internet pioneer. Though the online display ad market is growing in the U.S.— especially in the sale of targeted ads based on unique data — Yahoo badly lags behind Facebook and Google. At the same time, Yahoo made "no strides forward in the dominant technology trends — social, mobile and cloud. And, if anything, they've lost even more ground," says Jonathan Yarmis, an independent tech analyst.

In September, Yahoo booted Carol Bartz as CEO after she failed to reverse its flagging fortunes despite 2½ years on the job. Then the board hired investment bankers Goldman Sachs Group and Allen & Co. to help the company explore its strategic options. In recent months, Yahoo has padded its editorial ranks, stealing key execs from CBS Interactive. Last week, the company bought online ad network Interclick for $270 million and bolstered its mobile and social efforts.

The confluence of seemingly conflicting strategies has confounded followers of the Internet company, inspiring the latest parlor game in Silicon Valley: What, exactly, is Yahoo's end game?

Yahoo's answer is that the board is exploring a wide range of options. The company says they can assure all Yahoo shareholders that whatever the outcome of the strategic review process may be, it will serve the best interests of all the company's shareholders.

In a Sept. 23 memo to employees, Yang, Filo and Yahoo Chairman Roy Bostock said the search is on for a full-time CEO and that company advisers are fielding offers from potential business partners. USA TODAY obtained a copy of the memo.

In the weeks since Bartz was bounced, Yahoo has had a flurry of activity under interim CEO Tim Morse. Last month, it announced a content-sharing and distribution partnership with ABC News and rolled out more than a dozen original Web series featuring actors such as Morgan Spurlock and Judy Greer.

But the purchase of Interclick — which reaches more than 120 million unique users a month, according to market researcher ComScore — is a head-scratcher because Yahoo already owns ad network BlueLithium, which has not panned out, analysts say.

Yahoo executives are betting the addition of Interclick makes it a stronger company or a more attractive acquisition target, Lee reasons. However, he said, "it is odd Yahoo decided its best option was to buy rather than to build on top of what" it already has.

Potential bidders

Yet the saber rattling by private-equity firms and other buyout shops storming the gates of Yahoo is building pressure on management. The company needs to move fast to prove its relevance or be sold at a bargain-basement discount. The problem: Yahoo isn't growing like it used to. And its prospects in the face of competition aren't great, either. Still, it's profitable and boasts a massive audience of 700 million users worldwide.

Much of the problem is leadership. Yahoo still doesn't have a permanent CEO. And then-CEO Yang's resistance to Microsoft's offer to buy the company in 2008 for $47.5 billion — double its current market value — has landed him in the doghouse. Yahoo's board ultimately rejected the bid.

Should Yahoo opt to sell, a long list of prospective suitors possibly awaits. Even Google's name pops up, although Alibaba Group, a Chinese Internet company partially owned by Yahoo, is the only bidder that has publicly declared its interest in mounting a takeover attempt.

Google and Yahoo declined to comment.

Others reported to be mulling an offer include Silicon Valley venture-capital firm Andreessen Horowitz and buyout firms KKR, the Blackstone Group and Silver Lake Partners.

Microsoft has been reported to be weighing whether to help finance a Silver Lake bid.

It would be folly for Microsoft, sitting on a heap of cash (more than $40 billion) to make another go at Yahoo, cautions independent analyst Damon Vickers. "These are two companies slowly fading away," he says. "If they merge, it would be like two cinder blocks sinking in water."

Despite its well-documented problems — three CEOs in a few years, for starters — Yahoo's audience of some 700 million people worldwide and its stakes in prized assets such as Alibaba and Yahoo Japan make it an attractive takeover candidate, says David Hallerman, an analyst at eMarketer.

By acquiring Yahoo, Google or Microsoft could eliminate a competitor and pick up valuable pieces from Yahoo in the process, says Carl Tobias, a professor at the University of Richmond's School of Law. But Google and Microsoft face antitrust scrutiny if they pursue Yahoo, he adds.

The takeover talk has helped lift Yahoo's stock price by more than 30% since Bartz's departure. Yahoo's shares rose nearly 3%, to close at $15.69 Monday.

Still, it is unclear if Yahoo will put itself up for sale as it explores ways to appease shareholders. Many stockholders are frustrated with the company's declining revenue at a time when the overall Internet advertising market is growing.

Yahoo's profit and revenue slipped year-over-year during its third quarter. Profits were $293 million, or 23 cents a share, compared with $396 million, or 29 cents a share, in the year-ago period. Revenue was $1.07 billion, vs. $1.12 billion a year ago, but in line with Wall Street expectations.

What the future holds

Yahoo's travails aren't likely to go away as it increasingly faces competitive pressure from Facebook and Google for users and advertisers.

Searches on Yahoo, for instance, were up only 1% in its third quarter, while search page views slumped 3%, the company said.

That, in no small part, has adversely affected Yahoo's online advertising business. While Yahoo's annual revenue from display ads is expected to improve 15% to $1.86 billion in the U.S. in 2012, Facebook's is expected to soar 45% to $2.9 billion and Google's 58% to $1.82 billion, according to eMarketer.

Yahoo said it has agreed to extend the revenue-per-search guarantee in its partnership with Microsoft through March 2013.

Earlier this year, however, Yahoo admitted the two-year deal was taking longer than anticipated to pay off because of technical imperfections in the search-advertising system.

Yahoo is being squeezed by Google's dominance in search and Facebook's in delivering targeted advertising to its 800 million members. With these two monster competitors offering scale, relevance and the power of the social graph — and with AOL's new Devil ad unit slowly gaining traction — the room for Yahoo to grow dramatically is narrowing.

In that Sept. 23 memo to employees, Yang, Filo and Bostock acknowledge Yahoo needs to "accelerate innovation, reignite inspiration, and give our users what they want now — great content that is engaging and easy to use on any device and provide an experience in which they can participate and contribute."

Such strategy dovetails with the advice of several industry observers, including Don Dodge, a former Microsoft executive who closely follows Yahoo.

He suggests that Yahoo hire a "product-driven CEO" who focuses on customers and eschews business deals; hold onto valuable equity holdings in Yahoo Japan and Baidu; and concentrate on Yahoo strongholds, such as Yahoo Sports and Yahoo Finance.